The Impact of ECB Monetary Policy on Stock and Bond Market Liquidity. The Case of Germany

Inhaltsverzeichnis (Table of Contents)

• Introduction
• Theory
  • Market Liquidity
  • Stock and Bond Market Liquidity
  • Market Liquidity Measures
  • Monetary Policy and Market Liquidity
  • Monetary Policy Measures
• Timeline of Monetary Policy Events
• Empirical Evidence
  • Descriptive Statistics on Liquidity Levels
  • Descriptive Statistics on ECB Monetary Policy Indictors
  • Vector Autoregressive Analysis
• Conclusion

Zielsetzung und Themenschwerpunkte (Objectives and Key Themes)

This paper explores the relationship between European Central Bank (ECB) monetary policy and liquidity levels in the German stock and bond markets. It examines how changes in key monetary policy variables, such as the EONIA interest rate and base money growth, impact the bid-ask spreads of the DAX 30 equity index and 10-year German government bonds.

• The impact of ECB monetary policy on market liquidity.
• The role of market volatility in influencing liquidity levels.
• The relationship between stock and bond market liquidity.
• The influence of economic variables such as stock returns and industrial production on liquidity.
• The effectiveness of ECB monetary policy in managing liquidity.

Zusammenfassung der Kapitel (Chapter Summaries)

The paper begins by defining market liquidity and outlining its various dimensions. It then discusses the theoretical relationship between monetary policy and market liquidity, drawing on existing literature. A timeline of key ECB monetary policy decisions from 2008 onwards is presented to highlight the evolution of their response to the financial crisis and subsequent Eurozone crisis.

The empirical analysis investigates the impact of monetary policy on liquidity levels by examining descriptive statistics for liquidity measures and ECB policy variables. A vector autoregressive (VAR) analysis is then conducted to further examine the relationship between endogenous variables, such as stock spreads, bond spreads, base money growth, and EONIA, and exogenous variables such as stock and bond market returns and volatility, industrial production, and inflation.

Schlüsselwörter (Keywords)

The paper focuses on the impact of ECB monetary policy on market liquidity, particularly in the German stock and bond markets. Key terms include: market liquidity, bid-ask spread, EONIA interest rate, base money growth, volatility, stock returns, industrial production, and VAR analysis. The research explores the theoretical connections between these concepts, providing insights into the mechanisms through which monetary policy affects market liquidity and the role of various economic factors in shaping market conditions.